I had never heard of an ESG score in my life. An ESG score stands for Environmental, Social, and Governance score. These are ratings that measure a company’s exposure to environmental, social, and governance risks. These risks include worker safety, energy efficiency, and board independence and all of these have financial implications. ESG scores/ratings can influence investors and may sway them for or against a specific company. What is interesting is that recent studies are showing that a 10 percent increase in corporate disclosure is associated with a 1.3 to 2 percent increase in ESG score variation among major ratings providers, which all interpret and process disclosures differently. More importantly, they are showing that the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions. By being transparent about their ESG scores, companies are actually disadvantaging themselves! This seems contradictory but that is why the latest research is shocking. These companies have a lot to lose with more than $30 trillion in sustainable investment capital on the line…Investors are dumping massive savings into companies they believe will help provide sustainable futures, so if their transparency is allowing the rating agencies to hurt the company, then the investors will hurt financially as well. If these investors pull out on their investments, many promising companies looking to change the world by preaching sustainability may go out of existence. This newest research raises questions on the effectiveness of the rating system and if the rating agencies need further regulation. I think most people would agree that all companies and corporations in the United States need some oversight to make sure they are not harming the environment, but maybe the rating agencies need additional oversight as well.
ESG Scores
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